Macroeconomic Effects of Active Labour Market Programmes in a Union Wage-Setting Model

Lars Calmfors and Harald Lang

Economic Journal, 1995, vol. 105, issue 430, 601-19

Abstract: The recent Western European policy debate on unemployment has emphasized the benefits of active labor market programs. The authors analyze the effects on wage pressure and equilibrium employment in a union wage-setting framework. Programs are wage-reducing to the extent that they help maintain effective labor-force participation but they may also weaken insider incentives for wage restraint as the disutility of layoffs becomes smaller. Targeting the long-term unemployed is crucial for the success of active labor market policy since the welfare effects on the laid-off then are more heavily discounted and employment opportunities are redistributed from insiders to outsiders. Copyright 1995 by Royal Economic Society.

Date: 1995
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